Mortgage: 25yrs vs. 35 yrs? (FTB)

japmis

I visited a mortgage advisor on Saturday ("Mortgage Advice Bureau") as I'm planning on buying my first property in the very near future and wanted to get all my ducks in a row before putting in any offers.

The mortgage advisor was really pushing me to apply for a 35 year mortgage rather than a 25 year mortgage. To be honest I struggled to follow his reasoning, but he said it was better to overpay monthly on a 35 year mortgage with lower payments than to just make regular payments on a 25 year mortgage. Something to do with getting a better LTV in 5 years time as I'll be paying off more equity in the short term rather the just paying off the interest???

Would love to know your thoughts on this.

I can definitely afford the monthly payments on a 25 year mortgage by myself without a lodger, so this isn't a question of affordability.

I am looking for a 2 bed maisonette/house in Hampshire circa £150k.

Looking forward to this thread! :T

Japmis

Cornucopia

The only advantage that I can see is that your standard payments will be lower, allowing a greater flexibility for overpayment.

The equity thing is wrong, AFAICS.

35-year only makes sense in the context of overpayments, IMHO. Otherwise you are simply increasing the amount of interest paid over the life of the mortgage.

koexelek

Main benefit of doing 35 years ( and overpaying to clear it in 25) is that if your circumstances take a turn for the worst, the minimum monthly payment you need to pay each month is lower.

getmore4less

japmis wrote: »

I visited a mortgage advisor on Saturday ("Mortgage Advice Bureau") as I'm planning on buying my first property in the very near future and wanted to get all my ducks in a row before putting in any offers.

The mortgage advisor was really pushing me to apply for a 35 year mortgage rather than a 25 year mortgage. To be honest I struggled to follow his reasoning, but he said it was better to overpay monthly on a 35 year mortgage with lower payments than to just make regular payments on a 25 year mortgage. Something to do with getting a better LTV in 5 years time as I'll be paying off more equity in the short term rather the just paying off the interest???

Would love to know your thoughts on this.

I can definitely afford the monthly payments on a 25 year mortgage by myself without a lodger, so this isn't a question of affordability.

I am looking for a 2 bed maisonette/house in Hampshire circa £150k.

Looking forward to this thread! :T

Japmis

talking nonsense, and you need to tell them they don't know what they are talking about or they are explaining it wrong .

Term is irrelevent once a mortgage is running.

The only thing that determines the future LTV is the total payments.

The advanatage of a longer term is your minimum contractual payment is lower so you can adjust down if finances get tight.

the longer term aproaches interest only.

http://www.whatsthecost.com/mortgage.aspx

eg £150k @ 4% term , payment, increment
IO £500
100 £510
75 £526
50 £579
45 £600 £21
40 £627 £27
35 £664 £37
30 £716 £52
25 £792 £76
20 £909 £117

kingstreet

I agree with koexelek.

If you choose to pay the same amount each month, you'll pay the mortgage back at exactly the same time, owing exactly the same amount at each point you choose to compare the balances.

The only difference, is the contractual payment is higher on the shorter term, so you're stuck with it. If you are making voluntary overpayments, you can always miss the odd month if you get some unexpected emergency expenditure.

japmis

koexelek wrote: »

Main benefit of doing 35 years (and overpaying to clear it in 25) is that if your circumstances take a turn for the worst, the minimum monthly payment you need to pay each month is lower.

Are there any other benfits for doing it this way? By over paying on a 35 year loan do I stand to make better headway clearing the interest?

People keep saying the first couple of years is just paying off the interest.

somethingcorporate

No, if you pay the same amount to a 35year loan to a 25 year loan you would pay them off at the same time and at exactly the same cost.

If you pay the 35 year one off over 35 years you will pay a lot more interest over the lifetime but initially it will make no difference especially if you intend to overpay to the repayment level of a 25year term.

The only difference (as has been pointed out a number of times) is that your contractual payment will be lower on the 35 year term.

getmore4less

japmis wrote: »

Are there any other benfits for doing it this way? By over paying on a 35 year loan do I stand to make better headway clearing the interest?

People keep saying the first couple of years is just paying off the interest.

More nonsense,

The interest is based on how much you owe not the term or other magic people make up.


The only thing that changes how much you owe is how much you pay.

Stick numbers in a calculator and look at the month by month numbers.

Harry_Boyle

I don't see an issue with either the 25 or 35 year mortgage terms because it's highly unlikely that you'll stay with the proposed mortgage provider for long anyway. When you move to a new provider in a few years (when your current deal has expired) then you'll renegotiate the mortgage terms anyway.

Personally I like to have the flexibility of lower monthly outgoings and so I have always had interest only mortgages. During lean times it means that you have a low compulsary payment to the mortgage provider and during boom times it means that you can make overpayments and blitz the mortgage, irrespective of your 'paper' mortgage term.

My first mortgage was for 25 years and lasted 7 before we moved. Our second mortgage was for 25 years and lasted 7 years before we moved. Our current mortgage term is 20 years and will end in May after 3 years when we move to a new provider. That term will probably be for another 20 years, but we won't have a mortgage for that long due to our overpayments.

JimmyTheWig

Initially you'll pay the same amount of interest if you owe the same amount of money.
If you pay the same each month (i.e. 35yr mortgage+overpayment = 25yr mortgage) then you'll be paying the same amount off your capital.
In which case your LTV will be the same in 5 years time either way.
Either you mis-heard or your advisor was talking garbage.

So we know that if you have the same interest rate and you pay the same amount each month then you end up in the same position. It is just a question of how you pay that amount each month.
So a mortgage of £135k at 5.5% will be £829 a month over 25 years.
A mortgage of £135k at 5.5% will be £725 a month over 35 years.
Basically a difference of £100.

You could go for the 35 year mortgage and overpay by £100 a month.
Or you could put this £100 a month into savings and make overpayments from the savings every now and again.
If you had a tight month you could not make the £100 overpayment / payment to savings. You could, then, pay £200 to cover it the next month.

This has advantages and disadvantages.
The advantage is the flexibility of it. If your boiler breaks down you'd have £100 that month towards the cost of repair. That could mean the difference between getting it fixed or waiting until payday. If overtime was low one month you could not make the £100 payment but then pay £200 the next month when there was lots of overtime. Etc.
The disadvantage is that it requires some organisation and willpower. There are always going to be "one-off" months where you need the money. E.g. December for Christmas. January when the Christmas credit card bill comes in. Your birthday. Your partner's birthday. Summer holiday. New iPhone comes out. etc. If you're not careful you will end up not making the £100 payment on many months - too many months to catch up on.
That would mean that your equity would be down in 5 years time and you would be looking at a 35 year mortgage rather than a 25 year mortgage. You will pay an awful lot more money in interest over the life of a mortgage if you take 35 years to pay it rather than if you take 25 years. [It's even better, still, if you can get it down to, say, 18 years.]

japmis

I love you guys and dolls

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